Another view on U.S. Treasury term premiums
AbstractThe consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as to net flight-to-quality flows after 2007. However, two strands of evidence raise questions about this story. First, a purely survey-based expected forward term premium measure, as opposed to an approximate spot estimate, has increased rather than decreased in recent years. Second, with respect to the time-series dynamics of factors underlying affine term structure models, simple econometrics of recent data produce not only a more persistent level of the term structure but also a depressed long-run mean, which in turn implies an implausibly low expected short rate path. Strong caveats aside, an implication for central bankers is that unconventional monetary policy measures may have worked in more conventional ways, and an inference for investors is that longer-dated yields embed meaningful compensation for bearing duration risk.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 658.
Length: 37 pages
Date of creation: 01 Dec 2013
Date of revision:
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-08 (All new papers)
- NEP-CBA-2014-02-08 (Central Banking)
- NEP-FMK-2014-02-08 (Financial Markets)
- NEP-MAC-2014-02-08 (Macroeconomics)
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